59 th UIA CONGRESS Valence / Spain

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INTERNATIONL MONEY TRANSFERSSFERS THE EXTENSION OF THE EXCHANGE CONTROL

1 59 th UIA CONGRESS Valence / Spain Octobre 28 - Novembre 1, 2015 FOREING INVESTMENT COMMISSION Saturday, October 31, 2015 EXCHANGE CONTROL IN INTERNATIONL MONEY TRANSFERSSFERS THE EXTENSION OF THE EXCHANGE CONTROL POLICY ONE HINDRANCE TO GLOBALIZATION Pr. Dr. MOHAMMED RACHIDI merachidi.m@gmail.com 1

2 Goals Currency exchange controls are restrictions imposed by a government on its own citizens purchasing foreign currencies and on foreigners abroad purchasing the home currency. They exist in countries with a partially convertible currency or a fully convertible currency They can take various forms as restricting buying and selling a national currency to preserve foreign currency reserves and help prevent a flight of capital from the country.. o merachidi.m@gmail.com 2

3 iiimm Horizontal extension According to a recent report, some two-thirds of the world's population is subject to some sort of exchange controls Restrictions are most often used by nations with weak currencies, All states, are members of the IMF and are thus bound by the IMF's Articles of Agreement. This agreement divides exchange controls into two categories:, controls on capital movements; and controls on payments for current transactions merachidi.m@gmail.com 3

4 Legal basis Article VI, of the International Monetary Fund s Articles, allows members to exercise capital controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which will restrict payments for current transactions... merachidi.m@gmail.com 4

5 Avoid current transactions Article VIII provides that no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions. but by obtaining approval a country faced with a severe crisis can do. The IMF has performed research showing that exchange controls may have a negative impact on international trade become one hindrance to globalization. merachidi.m@gmail.com 5

6 GATS Article XI Of General Agreement on Trade in Services (GATS), provides that members must not apply restrictions on international transfers and payments for current transactions relating to its specific commitments. At the same time Article XI goes on to allow members to introduce exchange controls if a member is faced with serious balance of payments deficit or external financial difficulties. Article XII of GATS permits capital controls if a member is faced with serious balance of payments or external financial difficulties. merachidi.m@gmail.com 6

7 Black market Often, foreign exchange controls can result in the creation of black markets, and therefore creates a shadow currency exchange market. Countries use exchange controls in an attempt to reduce capital flight when it is important enough to affect national economies. There are a number of different types of foreign exchange controls. Some of these types of controls can include: merachidi.m@gmail.com 7

8 Different types Maintain the exchange at a higher rate than the free market would dictate. Exchange Rate either above or below the market rate helps to prevent volatile exchange fluctuations By rationing and controlling the amount of foreign currency available for exchange, governments may influence the forces of supply Blocked Accounts. merachidi.m@gmail.com 8

9 Different exchanges rates Governments can have more than one rate at which currencies are exchanged and use different fixed exchange rates for capital and current account transactions.. A state may have entered into a bilateral investment treaty (BIT) with another country with a view to encouraging mutual direct investment. merachidi.m@gmail.com 9

10 Intensity of Restrictions We can mention 5 levels of restrictions No restrictions but information for statistics necessities to demonstrate the legitimacy of the transaction is necessary. Administrative requirements such as procedural steps or documentation for all transactions that are not substantive restrictions but may represent an unnecessary cost to doing business. merachidi.m@gmail.com 10

11 Levels Moderate restrictions represented by substantive limits on the nature of a transaction, such as timing restrictions on when payments may be made; or if government authorization is required, but is granted for all legitimate requests. Heavy restrictions. Extreme restrictions The transaction or operation is not allowed by law, or does not occur at all in practice due to excessive regulations. merachidi.m@gmail.com 11

12 Lists of import goods This policy was practiced in many countries between the sixties and the eighties. For example Morocco had three lists A, B, and C for imports, C the list of prohibited goods for import, list B Products importable under license. merachidi.m@gmail.com 12

13 Echange control today Regarding exchange controls in the world today, in an analysis carried out in 2013, the World Bank has identified 53 economies which maintain an exchange rate regime generally with no restrictions on foreign direct investment, 24 economies impose moderate to heavy restrictions across most transactions covered by the Converting and Transferring Currency indicators, and 21 economies imposing administrative or procedural requirements. 13

14 In Africa Foreign exchange control regulations are not uncommon in Africa. These regulations essentially exist as a means for a country to maintain the stability of its own currency. The two poorest regions of South Asia and the sub- Saharan Africa are the most restrictive regions on average. 38 percent of low-income countries impose heavy to moderate restrictions, but another 38 percent of these economies maintain systems without any restriction. 14

15 Exceptions Most countries on the continent have varying degrees of exchange controls, but there are a few examples where there are little or no restrictions, such as Botswana, Mauritius, Rwanda, Uganda and Zambia. These countries are taking a proactive approach to promoting their economies to investors in an effort to become regionally competitive 15

16 Exchange rate and regime of control The relationship between the exchange rate regime and the exchange controls regime has several subtleties that must be well understood in order to better appreciation of the economic relevance of the exchange control regime in force. In this regard, when an exchange rate regime deemed appropriate for a given country is more flexible than the existing one, this country will be considered predisposed to abandon the exchange control regime, taking into account that it can to implement a more flexible exchange rate regime. 16

17 IMF Study Indeed, an IMF study showed that countries which tend to liberalize the capital account control, they adopt a more flexible exchange rate but with a time lag. The study also showed that some controls on financial derivatives and commercial banks transactions were liberalized after the introduction of flexibility in the exchange rate, relaxation of controls on institutional investments, on personal assets and on money market instruments is often adopted with a longer period 17

18 Exchange Rate The economic literature has identified a number of factors relating to Initial conditions regarding the establishment of exchange control regime, as the level of international reserves, macroeconomic conditions, structural characteristics of the economy, its openness, its degree of capital mobility, of financial system, rigidity of the labor market, fiscal flexibility, the banking system; etc 18

19 Dual exchange rate When faced with a sudden shock to its economy, a country can opt to implement a dual or multiple foreign-exchange rate system.. Fixed Exchange Rate Floating Exchange Rate unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation. 19

20 In reality, no currency is wholly fixed or floating. Pegged currency, ccurrency pegging is the idea of fixing the exchange rate of a currency by matching it s value to the value of another single currency or to a basket of other currencies, pegging can be especially beneficial for the smaller country, which depends more heavily on international trade. 20

21 Pegged curency There are at least 66 countries that have pegged their currencies to the dollar, 25 countries to the euro. The reasons for this operation are related to the search for stability, a country may decide to peg its currency to create a stable atmosphere for foreign investment, with this link, the investor can always know the value of its investment and does not care daily fluctuations 21

22 Moroccan pegged dirham MAD The Moroccan Dirham is not freely convertible. His course is pegged to a basket of currencies including the currencies of its major trading partners, but with an over-representation of the euro 60 % against the dollar 40%, this weighting of the basket of currencies is explained by the fact that Europe is to far the largest trading partner of Morocco. 22

23 Liberation and flexibility This Exchange rate policy allowed monetary authorities to accumulate high levels of foreign exchange reserves. Authorities consider the opening of the capital account may produce a risk concerning the maintaining of the exchange rate at an incompatible level with economic performances. The link between full capital account liberalization and flexibility should be taken into consideration for a successful transition. 23

24 Balance of paiements The primary reason that countries impose exchange restrictions is to protect weak balance of payments positions. If countries have limited foreign exchange reserves, they may try to direct the existing foreign exchange towards economic transactions considered to be vital. The analysis of balance of payments is fundamental before to take a decision concerning any foreign exchange controls and the exchange rate regime. 24

25 Balance deficit A Balance of payments deficit, is accompanied by an decumulation of foreign exchange reserves by the central bank. The financial situation of balance of payments is directly related to exports, transfers specially remittances of national citizens abroad, tourism receipts and foreign direct investment 25

26 Capital flight Macroeconomic and prudential policy goals are motivations for controls specifically on capital flows, such as to reduce the volatility of shortterm capital flows or to protect underdeveloped financial markets. Countries may also impose controls during economic crises to prevent capital flight. 26

27 Consensus There is general policy consensus that payments for current transactions should be allowed freely. These transactions include payments such as for imported goods and services or making interest or dividend payments abroad, and are differentiated from capital transactions such as investment flows. 27

28 Importance of foreing remittances In the worldwide economy, foreign remittances represent one of the major international flows of financial resources in MENA countries, Algeria, Egypt, Jordan, Libya, Morocco, Oman, Syria, Lebanon and Tunisia. They represent an important part of international ressources for the countries of North Africa and contribute around 6 to 7% of GDP in Morocco, Tunisia and Egypt 28

29 Foreign currency reserves, The inflow of remittances to Morocco increased at an annual rate of 14. % from 2000 to 2008 according to the World Bank data.. Remittances can build foreign currency reserves, address balance of payments deficits, and enable investment in projects involving infrastructure, health, sanitation, and education. 29

30 Liberalization of the capital account Foreign Direct Investment inflows are generally the first to be targeted for liberalization in an appropriate sequencing, as they are the most stable and the most correlated with growth. Often, foreign exchange controls can result in the creation of black markets to exchange the weaker currency for stronger currencies. The objective for any country is to open its economy to global economy so as to spur economic growth, through providing access to foreign savings and to adopt market economy 30

31 Mena countries In the three North African countries, the exchange rate regimes have evolved over time from fixed to more flexible, as the ability to adjust to shocks gained in priority: Egypt s exchange rate was characterized by a substantial rigidity 31

32 Tunisia Like most emerging and developing countries, and to take advantage of its integration into the global economy, Morocco has followed an economic openness policy through a gradual and accompanied process of openness. In 2012, the Tunisian exchange rate regime was classified as crawling peg by the IMF 32

33 Money laundring Foreign exchange controls may increase money laundering and terrorism financing risks when individuals, particularly immigrant workers, and businesses seeking to operate internationally need to find alternative means of managing 33

34 Moroccan case Morocco has established currency convertibility for current account and capital account transactions for non-residents from 1993 and forwards to facilitate payments for transactions under the capital account for residents. A precondition for the establishment of the current convertibility and full convertibility is an appropriate exchange rate. 34

35 The Moroccan Foreign Exchange Office This Office is responsible for two main tasks: - Enacting measures relating to exchange regulations, has delegated to banks the power to freely make almost all financial payments outside Morocco in relation with export and import operations, international transport, insurance and reinsurance, technical assistance, travel, tuition - Establishing the statistics of foreign trade and balance of payments. 35

36 1.1. Measures concerning individuals resident in the country - The free transfer of savings income: Foreign nationals residing in Morocco may freely transfer through banks, savings on salaries, wages, pensions and fees, as well as contributions due to social security and pension in their country of origin - The annual tourist allocation amounts for each foreign and Moroccan resident 36

37 1.1. Measures concerning individuals resident in the country - The right of students to transfer the monthly tuition fees of insurance and mutual, rent and related expenses, costs of the acquisition hardware and repaying student loans - The provision for medical care: Moroccan residents have the opportunity to travel abroad for medical care 37

38 1.2. Measures of exchange controls on non-resident individuals Revenues collected in Morocco by non-resident individuals (rents, other income...) are transferable 1.3. Measures of exchange controls for companies in terms of current operations, the regulation aims to promote foreign trade: 2 The control of change on investment operations 38

39 2.1 Measures of exchange controls on non-resident individuals Foreign investments have a full convertibility regime that guarantees foreign investors full freedom to realize their investments in Morocco; the transfer of income generated by these investments without limitation amount or time and transfer the proceeds of sale or liquidation of the investment premium, if any, of realized gain. The government allows free repatriation of investments and investment returns, such as capital gains, dividends, interest or sales etc. 39

40 2.1. Convertibility is guaranteed for foreign investments For legal persons of foreign nationality, resident or non-resident, and individuals of Moroccan nationality established abroad Banks can now grant to individuals not resident foreign credits dirhams intended to finance the acquisition or construction of real property in Morocco Operations are liberalized external financing. Operations of external borrowing by Moroccan companies, or through a Moroccan bank are authorized to finance import transactions, exports and investment 40

41 3 -Exchange controls on individuals permanently leaving the Moroccan territory 3.1. For foreigners, a right to immediate transfer amount per year to stay in Morocco and any balance registered a convertible term account A severance allowance for emigrants Moroccans. Moroccans who obtained a visa emigration are permitted to transfer an allocation installation, are allowed to increase the amount of investment abroad to 50 million dirhams a year and 100 million per year for those who choose to invest in Africa. 41

42 . Moroccan law limits individual citizens to the equivalent of US$5,000 per year in foreign exchange, meaning that anyone who wants to spend more than that overseas must look for alternative ways to move money out. Moroccans can now buy property abroad after permission of the Exchange Office 42

43 Thankyouverymuch for youkindattenttion Pr. Dr Mohammed Rachidi Casablanca, Morocco 43

Introduction to MOROCCO

Introduction to MOROCCO With a GDP of USD 101bn in 2015, Morocco is a medium-sized economy. Sound macroeconomic fundamentals, a resilient and sophisticated banking sector and the implementation of structural